Tanker Shipping - Few escape routes for the already stressed out tankers – Summer is unlikely to heat freight rates

Tanker Shipping - Few escape routes for the already stressed out tankers – Summer is unlikely to heat freight rates

Overview

A fundamentally weak oil demand that is negatively affected by the high oil prices is hampering demand for both crude and product tanker tonnage. The weak demand is set to stay around according to IEA, which projects limited growth in 2011 of 1.5% against the 3.3% rebound growth in 2010.


Listen to podcast of this article

Demand:
A fundamentally weak oil demand that is negatively affected by the high oil prices is hampering demand for both crude and product tanker tonnage. The weak demand is set to stay around according to IEA, which projects limited growth in 2011 of 1.5% against the 3.3% rebound growth in 2010. This is translated into an estimated tonnage demand growth of 3.2% for crude tankers and 3.1% for product tankers.

Increased Japanese demand for fuel following the earthquake has positively affected the tanker markets, but no massive rate gains have been developed as supply remains abundant.

Looking back at the markets so far in 2011, they have been nothing but awful. In particular, crude tankers have found it continuously difficult to make decent earnings on most trades – if any earnings at all. Despite a few strong fixtures out of Libya or some shorter-lived spikes originating from arbitrage opportunities, the overall freight rate environment has meant losses to many tanker owners.

2011-year-to-date average earnings as compared to annualized 2010-averages on representative routes for VLCC (TD3), Suezmax (TD5) and Aframax (TD7) show that a VLCC is down from USD 40,500 per day in 2010 to just USD 13,500 per day (-67%). A Suezmax is earning just USD 15,000 on an average day of 2011, down 38%. Meanwhile, the market has been relatively more merciful on Aframaxes, with 2011-average earnings of USD 15,500, down only 18% on the 2010-average.

CRUDE -
Demand for second hand crude tanker tonnage has been extraordinary weak in May – just four sales have been recorded. As the first four months of 2011 has closely followed the trend from 2010, this softness is expected to be temporary.

There are still 23 VLCCs in the active fleet that “should” have been phased-out by the end of last year; 22 single skins and one double sided vessel. They are, on average 21 years old, ranging from building year 1975 to 1996. The very few vessels left trading are more or less exclusively serving WC India with oil from AG, chartered primarily by the state-owned Indian Oil Corp. Indian Oil controls 10 of India’s 20 refineries.

Many single hulled VLCC’s were demolished in 2010. But extensions beyond the deadline made it possible for some vessels fulfilling the CAS requirements to trade beyond 2010; amongst them is the Vela owned Alphard Star, which passed its third special survey last year and is thus able to trade until 2015.

Where have they gone, if not to the breakers' yards? No fewer than 80 vessels are on record as having been converted into Very Large Ore Carriers. Also, several newer single skins have been converted into FPSO’s (Floating Production Storage Offloading) while others do a final stint as FSU (Floating Storage Unit) in AG or near Singapore.

By the end of 2006, as many as 163 single skin vessels were trading, but it was the financial crisis that kick-started the phase-out in combination with the deadline getting closer. In the past 2½ years 99 VLCCs have left the fleet.

The trading prospects for the remaining vessels are scarce and of little profitability. With double-hulled modern VLCC tonnage making USD 22,000 on 2011-averages, charterers see no reason for hiring a single skin and the risk attached, when you can get a brand new vessel at a bargain-freight rate.


PRODUCT –
In the product segments, the routes TC2 and TC3, which are the prime clean product trades going into the US from Europe and Caribbean, have been the positive surprise this year following the hardship in 2010. The upswing came about due to the high gasoline prices in the US and the opening of the arbitrage in a combination with less clean tonnage available than foreseen. That surprise was due to the excessive shift of product tankers into the dirty trades, as rates were better there.

As forecast in the last BIMCO Shipping Market Overview & Outlook, we expected several weeks of on-going firm rates for the Atlantic clean market and we got it – as it lasted until the first half of May before freight rates took another nosedive. This time around, rates went all the way from mid-20’es to USD 7,500 per day.

For the larger sizes of product tankers, LR1 and LR2, the trades are more rigid and they continue to produce poor returns. 2009 was poor, 2010 worse and so far 2011 has provided for even lower earnings, almost regardless of the trade being clean or dirty.

Supply:
The active product tanker and crude oil tanker fleet has grown by 1.6% and 2.4% respectively so far in 2011. 1.7 million DWT of product tanker tonnage and 8.3 million DWT of crude tanker tonnage has been launched so far in 2011.

BIMCO forecasts an inflow of new crude tankers in 2011, just a little shy of 35 million DWT. With demolition expected to be around 3 million DWT, the crude tanker fleet is forecast to grow by 9.2% in 2011. But demolition is about to surprise on the upside as freight rates remain sluggish and breakers' yards offer LDT-prices on the right side of USD 500 per ton. This leaves upside potential that may result in a lower fleet growth.

Four months ago it seemed as if 2012 was to surpass 2011 in terms of crude tanker deliveries. But things have turned around now and more near term supply-side pressure than originally forecast is now in the making for crude tankers.


Outlook:
The US Summer driving season is upon us again – but do not expect anything extraordinary to happen rate-wise, despite likely higher activity on TC2 and TC3. As US gasoline stocks are at average size, they leave little room for an extraordinary demand boost for that reason. As US gasoline prices are still high and even though the Americans really like to drive their cars, the driving season is unlikely to create a demand squeeze for tonnage in the clean product tanker market.



The US National Oceanic and Atmospheric Administration (NOAA) predicts that the Atlantic basin will probably experience above-normal tropical weather activity during this year’s hurricane season (Start of June – end of November). NOAA projects that 12 to 18 named storms will form within the Atlantic Basin over the next six months, including six to ten hurricanes, of which three to six will be intense.

EIA estimates that median outcomes for shut-in production in the Gulf of Mexico as a result of disruptions during the 2011 hurricane season are 19 million barrels (bbls); total season outcome range is 3.2 and 53.5 million bbls of crude oil. The latest hurricanes to affect shipping seriously were Gustav (39) and Ike (22) in 2008 and in particular Katrina (30) and Rita (70) in 2005. Million bbls of crude oil production shut-in in brackets.

BIMCO expects that freight rates in all crude tanker segments will have a slow Summer, with rates around USD 20,000 per day unless unexpected events disrupt the availability of oil, supply-side pressure and slow demand growth being the reasons.

in Copenhagen, DK

Coronavirus

Access BIMCO's free COVID-19 related articles and advice.

Read more

Latest piracy reports

Latest industry releasable threats

 
 

ELSEWHERE ON BIMCO

Contracts & Clauses

All of BIMCO's most widely used contracts and clauses as well as advice on managing charters and business partners.

Learn about your cargo

For general guidance and information on cargo-related queries.

More about cargo

BIMCO Publications

Want to buy or download a BIMCO publication? Use the link to get access to the ballast water management guide, the ship master’s security manual and many other publications.

About a new business partner

We can help members check new business partners. We also help to recover millions of USD (undisputed) funds every year.